How to Read Crypto Candlestick Charts?
Did you know that candlestick charts, which are used worldwide to visualize price data in financial markets, were actually invented over 300 years ago by a Japanese rice trader named Munehisa Homma? He used candlestick elements like the open, high, low, and close to chart rice prices. If you’re curious about how these charts work, keep reading to learn more about the intricacies of candlestick charting.
Let’s mastering crypto candlestick charts to exploit trading opportunities!
What are Candlesticks Charts?
Candlestick charts are a combination of multiple candles that a trader analyses to anticipate the possible price movements of a certain crypto token in the market. Simply put, candlestick charts are a technical tool that helps traders in compiling a complete visual representation of how the price of a token or tokens has moved over a given period.
To sum it up, candlestick charts are used by traders to represent the price evolution of an asset. While candlesticks may be harder to comprehend initially, they offer far more information than a simple line chart. Candlesticks act as a crucial price action tool that helps in laying down a piece of detailed information about the price which includes the open, close, high, and low for a particular time frame.
Bar charts and candlestick charts are similar but have key differences. In a candlestick chart, the difference between the open and close is shown by the candle body color. In a bar chart, the vertical line has two horizontal lines on either side.
After a candle forms, crypto traders can forecast if the trend will continue or reverse. So individual candles or groups of candles are used to predict future price movements in crypto trading.
A candlestick chart combines candlesticks to forecast price movement. In other words, it’s a technical tool giving traders a visual representation of how price moved over a period.
Each candle provides key details on open, close, high and low prices for a set timeframe. But it differs from a bar chart.
Here is an example comparing a bar chart and candlestick chart:
Why Most Traders User Candlestick Charts
Throughout the years, the practical nature and efficiency of candlesticks lent to their explosion in popularity. The adoption of candlestick charts by most Trading platforms have made them the standard type of stock chart used by traders. Candlestick charts can be used across all financial instruments along with numerous indicators and patterns to develop trading strategies. They are easy to understand, convenient to use and enable efficient price interpretation.
Components of a Candlestick
The “timeframe” of a candlestick chart identifies the period of time that each candlestick represents. A 15-minute candlestick chart is composed of candlesticks representing 15-minute increments of data. A candlestick is composed of four components, which are key prices for that specified timeframe). These four components of a candlestick are the prices making the open, high, low and close:
- The Open is the first trade price for the candlestick period. This also marks one end of the body of the candle.
- The High is the highest trade price for the candlestick period and is also displayed as a wick, which is a vertical line.
- The Low is the lowest trade price for the candlestick period and also displayed as a wick or tail.
- The Close is the last trade price for the candlestick period and marks the other end of the body.
A candlestick body is comprised of the open and close trades. If the open is higher than the close, then the body is colored red. If the open is lower than the close, then the body is colored green. The high and low is represented by the vertical lines above and below the body, also referred to as wicks or tails.
Candlestick charts show bullish and bearish candles where the price opens in one direction and closes in the opposite.
The body shows the open and close prices. In a bullish candle, the open is lower than the close indicating upward movement. In a bearish candle, the open is higher than the close showing downward momentum.
Body size reflects market pressure. Long bodies signal strong movement while short bodies show little price change.
Green candles typically depict bullish pressure and red candles show bearish pressure. But colors can be customized to suit trading preferences.
Shadows mark the high and low over the time period. Upper shadows show the highest price and lower shadows mark the lowest price.
How to analyze candlestick charts
Candlestick charts are like a price storybook.
Though simple to grasp, analyzing them takes skill.
Here’s how to read candlestick charts:
Start from the left until you see the first candle.
For a 15-minute chart, examine the past month — no earlier.
Focus on the trend speed and how candles form at trend turning points.
For example:
The chart shows Bitcoin’s daily candles moving up from a bullish engulfing pattern. The trend then corrected downward before printing another bullish engulfing candle and rallying to a new high.
For robust candlestick analysis, utilize indicators like Stochastic, RSI and Moving Averages to precisely determine price direction.
Key tips:
Use higher time frames.
Focus on price action at key support and resistance.
Triangle Patterns
Triangle patterns are formed when buyers and sellers cannot decide on the market. As a result, the price begins to shrink due to the lack of supply and demand.
Triangle pattern form as price oscillates between two converging trendlines.
Types:
- Ascending triangle — bullish, signaling a potential upside breakout. Flat resistance with rising support.
- Descending triangle — bearish, signaling a potential downside breakout. Flat support with falling resistance.
- Symmetrical triangle — price squeezes then breaks up or down. Rising support and falling resistance.
The chart shows a real example of a symmetrical triangle on Bitcoin’s daily. Within the pattern, price made lower highs and higher lows.
Price then broke out and rallied strongly.
We’ve covered the basics of candlestick chart analysis and the most effective candlestick patterns. This knowledge will help you make more informed trading decisions. If you’re a beginner and want to deepen your understanding of technical analysis in Cryptocurrencies, I highly recommend checking out OKX’s educational resources. They offer a wealth of free materials to study and help you master trading. Good luck in mastering trading!
